The Problem with Traditional House Hacking (& Why I Had to Find a Better Way)

by | BiggerPockets.com

My view of what house hacking is and how to use it is quite different from what is commonly discussed on BiggerPockets. In order to better understand what I’m proposing and whether it is appropriate for you, we must address the global perspective on why we do things in general—and then boil that down to the level of house hacking. We began this discussion in the previous article. Let’s continue.

What Is House Hacking?

Think of house hacking as a blend between that which is home for you and your family and that which is a real estate investment. The thing we must acknowledge here is the very well-hidden-in-plain-view reality, which is this:

It is hard enough to find a home that works for your family without any regard to its investment value. And, as you know, it is also hard to find an investment property worth buying, without any consideration given to it becoming your home. But combining these two perspectives together and finding a piece of real estate that works as both a great home for you and a good investment opportunity is just crazy hard. Think needle in a haystack.

rental-property-pros

Related: The Tax Implications You MUST Understand Before House Hacking

Some Perspective

The main objective behind house hacking is to offset the monthly burn. But at what cost?!

There are two ways to look at this problem.

Scott Trench’s way is finance-centric: I will buy a property that fits my financial plan. I am OK sacrificing comfort for the greater good of my wallet.

While principally this is not wrong, it obviously only works for Scott, Craig, and their friends under the age of 30 who’ve discovered independence from their parents and some degree of personal finance. This, by the way, is no small thing among the Millennial generation and is to be applauded. (Scott and I argue publicly because it’s good for ratings, but I wonder how much we actually would agree upon in private.) That said, what’s good for Scott is not workable for all of us.

Another perspective is life design-centric: The main point of house hacking for me is not saving money—that’s the necessary augmentation. But the main point has to be the comfort of my family. In other words, doing an effective house hack is pointless unless we are getting exactly what we want relative to life design. We are not willing to compress ourselves even one iota in order to save money. We want what we want, and saving money (by way of house hacking in this case) simply has to fit the overall picture. 

The thing is, if we do this right, we can have both. We can have all of the above. 

Abundance of resources, not scarcity! The reason I did this house hack is because it got me to where I was going more quickly and more easily than any other approach—and where I was going was to 10X my lifestyle.

The Problem

What we want costs some dough. And while I think differently from Scott in a lot of key ways, in at least one way we think alike—we want someone else to pay for our lifestyle. This might sound cynical, but it’s the truth, guys. It’s the essence of real estate and business in general.

Since, as we established, we were not willing to compromise on the lifestyle to accomplish this, I could not simply start with the math. I could not say, “The numbers look good on this, so let’s do it.”

Related: A New Way to Look at the Concept of “House Hacking”

Instead, I had to start with the product. The location, house, footprint, amenities, and all the rest had to conform to the vision of what we wanted and needed for our family. Otherwise, there was no point to this exercise!

This meant that once I found exactly the thing we wanted, then I had to find a way to “bend” the math to facilitate the deal!

These are the different approaches—one starts with the math, while the other starts with the quality of life. An elegant solution was required, but more on that later.

OK, let’s just agree—we are not renting futons or bedrooms in our SFR.

I know what you are thinking: If we are not renting spare rooms, then we must be searching for a small multifamily. The reason you are thinking this is because it’s everyone’s go-to solution.

I considered it, but decided against it.

credit-report-loan

Small Multifamily Has Drawbacks in House Hacking

There are some very real drawbacks to using multifamilies to house hack. It’s true—some people will be able to work through these drawbacks. Nonetheless, let’s touch on some of the issues of house hacking in multifamily.

They’re not upscale enough.

Fact: You are highly unlikely to find a multifamily where you can combine the words “house hacking” and “luxury” in one sentence. Indeed, most multifamilies are not well enough located and constructed to facilitate any type of lifestyle upgrade for most people.

Well, that kind of kills it for me. How about you?

Management is more challenging.

Follow my logic. It needs to be mentioned that:

  • If you buy a higher grade asset, you’ll be able to charge more.
  • If you can charge more, your audience will be more affluent.
  • A more affluent audience is generally easier to manage (not always, but as a general rule of thumb).

Most of the money in income property is lost by way of economic losses, and so you have to ask yourself, what do I want to own and which will attract the audience that is less likely to cause economic losses?

Most of the time, the answer is not multifamily. 

They’re not private enough.

I’ve got two kids. Privacy and safety, for me, were absolutely paramount. And this concern is not eliminated by not sharing bedrooms. The proximity in multifamily is a bit much for me. How about you?

Today, multifamilies are over-priced.

…at least any place you’d remotely want to live in.

The exit strategy is cloudy.

Exit is all about who your market is and your ability to align yourself with them. The fact is that out of 100 potential buyers of that 4-plex, 99 are investors. Limiting yourself in such a way on the exit is not smart.

Conclusion

Someone accused me the other day of asking questions instead of giving answers.

Yeah—so what?!

There are a lot of dynamics and mechanics I could be talking to you about—and I have, and I will. But what I really want you to take away is the concept of abundance. Life is to be lived fully and without compromise. House hacking is to be done without compromise as well. The more you think “small,” the more “small” you’ll attract into your life. 

None of that nonsense, guys! Abundance is yours; you just have to materialize it.

Next week, I’ll give you my formula! (P.S. The answers to the questions are between the lines!)

Are you house hacking as a real estate investment strategy? Do you agree with the drawbacks above—or have you found a way around them?

Weigh in with a comment!

About Author

Ben Leybovich

Ben Leybovich has been investing in multifamily residential real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben is a licensed Realtor with YOCUM Realty in Lima, Ohio. He is also the author of Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.

55 Comments

  1. Amanda Cook

    Hi Ben, You’re such a tease! We have to wait until next week for more wisdom. It is refreshing to have questions brought forth and not just simple answers. Life is like that – lots of questions and it seems that time, experience, and learning from others help us to figure out the answers that fit our family and life the best.

  2. Sam McPeek

    We are house hacking in a duplex. I agree with the listed drawbacks, as sharing a wall and a yard means your sharing noise and mess (kids toys). Also, there is the consideration of each other’s privacy and living space. All that to say, we are happy (for now) sacrificing that privacy in exchange for our tenants paying our PITI on the property.
    I’m interested in the next couple of articles, as we have talked about moving on or upgrading our housing a bit but we really enjoy having other people pay for our living expenses!

  3. Chris Ayers

    I always thought the same Ben. Lots of people on this site point out that house hacking is the best, but only if you are young and used to dorm living. It should be called “The 20 somethings guide to RE investing.” Not to pick on Scott (seems like you’ve done that enough already), but that strategy only works for a select (read:young) group of people out there. I’m in my 30s now so I feel like it’s kosher to whine about millennials now 🙂

    Wait until you have a spouse and kids. Do you think my wife wants to live in a multi family home? No way. You mentioned all the cons but add in that the locations less desirable too. Some areas don’t even have multi family homes. In Northern VA, not only are there barely any multi’s out there, but most communities have HOAs.

    I technically did house hacking before I even knew what that term meant when I had roommates living with me in a home I purchased and it worked well … because we were in our 20s.

    It will be very interesting to hear about your “upgraded house hacking” ways Ben.

    • Kayla Lyon

      Chris, I’m with you on all accounts! I was hoping to find a small multi or two in Northern VA not to house hack but just as investments and they’re not exactly easy to come by! Plus the numbers right around the beltway are outrageous… which is why our rentals are currently in Alabama… and I’m also super interested in hearing about Ben’s “upgraded house hacking” 🙂

    • Heather Rhoden

      I agree with you 100%. I wish I would have heard of house hacking when I was in my 20’s. Now I’m 31 and I’ve looked into house hacking options and I just can’t bring myself to squeeze into a smaller place in a worse location.

      And roommates? Um…no. I can barely keep the peace with my wonderful boyfriend. I will absolutely KILL the person who drinks my milk or eats my chocolate or looks at my cat funny.

      Now that I’m planning on moving back and investing in my home town in Florida, I don’t even think they HAVE multi-families. I never even heard of one until I moved to NJ.

      I guess we’ll see what the solution is next week! 😛

  4. Matt Souza

    Hi Ben,

    I understand that you are generalizing 2-4 unit properties when you make your claims against them, but your arguments do not hold up in multifamily-dominant markets. Take the city of Chicago, for instance. The vast majority of living space in the city is either high-rise apartments/condos or 2-4 unit properties, SFHs are rare because the cost of owning one unit on an expensive piece of land. Because multifamily properties are so common, it is very easy to find spacious, “upscale” properties, and thus high-end tenants. I lived in a 3 bed/3 bath 2400 sq/ft unit within a 3 unit property in the city, it was the most luxurious place I have yet lived.

    Moreover, I would argue that management of tenants is easier when they live in the same building as you, assuming you self-manage all of your own tenants. Privacy is usually limited when living in a major city regardless of the house type, so that argument does not hold either.

    I do agree that the exit strategy is more difficult than SFHs though, since you are mostly competing with investors and therefore will not get a retail price on the selling side. I would just caution against making sweeping assumptions about multifamily properties, while not considering what markets your readers may be looking in. Regardless, I am still intrigued as to how you finish your next post and will continue to follow.

    • Ben Leybovich

      Matt – interesting perspective. Couple of thoughts:

      You are correct in that there are places in the North East and Mid West that have mainstreamed multifamily. You are right – I should have annotated this.

      Having said this, though, for every 1 person wanting to relocate to Chicago, 10 want to leave. Property values are one aspect. Property tax is another. Income tax under Emanuel is another. Crappy weather is another. What I’m trying to say is that when I close my eyes and picture paradise, Chicago is not what I see…:)

      I totally agree with you that management is infinitely easier on-site. However, I am making the case that if you do it like I did this doesn’t have to be mutifamily.

      Thanks so much!

      • Tim Wade

        Hi Ben,

        My wife and I are in the process and digging into the House Hack concept. Very much looking forward to your next post.

        I lived in Chicago a long time ago and was going to dispute your claim of people not wanting to move there… but in researching I found you were totally right: http://trib.in/2nGT8eK

        Learn something new everyday. Cheers!

        • Ben Leybovich

          Tim – move to AZ…I’ll hook you up! hahah

          Yeah, listen – there is very little magic here. You increase taxes every year – more people are going to leave every year…

          And we are not talking about House Hacking. This is one of those times where be careful of who you listen to 🙂 The focus has to be life design. If you get this wrong you (and by that I mean your wife) won’t be happy 🙂

          Thanks so much!

  5. Chris masons

    Hi Ben,

    Nice article and some not so obvious pointers and thoughts on house hacking.

    This is how I got my start. Some of the issue you mentioned I didn’t have to deal with as I did this when I Was first married and had no kids so the issues of privacy and or kids were not an issue.

    I bought a Mother/daughter lived on main floor and basement while I had a small 1 bedroom on 2nd floor that I rented out. This is my ideal model having smaller unit on floor #2 to attract a single person or a couple (much less noise with no kids or large family upstairs)

    Anyway, I lived there for much longer then I planned as my tenant was paying 3/4 of my mortgage so I was able to bank roll cash quickly and bought several other properties while living here…. Eventually all good things end as my wife wanted her own single family house (she was a good sport for 11 years) and we moved and bought a single family.

    I still own this Mother/Daughter and tell my son that one day he may be occupying the 2nd floor of this house 🙂 BTW this house is the one in my avatar. This house has a special place in my heart and I don’t think I will ever sell it!

  6. Ben Leybovich

    Christy – yours is a great comment. A couple of thoughts come to mind:

    On one hand CA would seem to be the ideal destination. However, regulatorily and property tax-wise it is worse than Venezuela and Russia combined. One of the main reason AZ is growing is because CA is not 🙂

    I was in CA about 2 months ago. A 2 bedroom bungalow in San Diego is going for easily $450 per square foot. No numbers known to mankind can make that math line up…

    I feel your pain 🙁

    • A couple corrections for you Ben. Property taxes are very low in California (Prop 13) and effectively much lower over time than likely every other state. Secondly, who the hell told you Calif was not growing should have their head examined. SF added 30,000 net residents last year for example. Any native resident losses are more than made up with immigration.
      Good luck!

      • Ben Leybovich

        Matt – the only problem being that no one can afford to buy anything 🙂
        I just visited family. San Diego is $500 per square foot and still needs work. 30 minutes outside of LA is pushing $800 per square foot. Even Oceanside is sitting at $350 per square foot.

        I understand the draw. My question is – how do you afford it?

        As to Prop 13, I am not entirely up to steam on that. But, seems to me that while it grandfathered existing owners with a pretty sweat deal, when I talk to people that buy today the story is a bit different. Frankly, they are screwed…no?

      • For LA affordabilty is at 29%. Many cheaper options and outliers all over. The desert areas are one. $800 sqft 30 mins outside LA likely a better area with good schools etc…Prop 13 works for new buyers too. The initial prop tax based on sale price is all, the percentage is low compared nationally. I have little doubt you could do what you are doing in AZ equal or for more $$$ in Socal.

      • For CA as well they passed the ADU law, so basically nearly every SFR can now have a legal additional unit. Thats big for airbnb seekers. As well as our 2-4 multis could have a much different tenant class generally then compared to other locations. So for what you are doing it could be very safe and secure. Keep in mind future wise we are also adding two NFL teams, Olympics and 50 million visitors a year.

  7. Jonathan Gould

    This is an interesting article ALMOST bait & switch, but the proof will be in next weeks pudding.

    I always struggle with the concept of not overusing resources and erring on the conservative side. ie: looking at hacking a quad that just came on the market that would turn about $100/door when & if i moved out & onto bigger things.

    But in this small town that i can’t move away from (my work) i’m deff open to abundance based ideas that are feasible/doable.

    Would you say that the abundance mindset works even for a broke/beginning millennial?

    • Ben Leybovich

      Love it, Jonathan!

      First of all, congratulations! You are some of the best that the millennial generation has to offer. Secondly, your comments are a bit of an oxymoron. You are in a small town – you can’t leave because of a job – yet, you want abundance.

      Don’t misunderstand me. You can have abundance in a small town. But, listen – if you don’t want to be there, why are you there? What – you don’t think you could get a better job in a bigger place, that’s growing? Of course you could!

      As we speak, in my house hack is living a young guy. He’s been there for about 10 days. He left his job in Wisconsin because he got a better job here. He left his duplex in Wisconsin and is about to go under contract for a nice house hack of his own. My wife is his agent. He is a student of mine in CFFU. And, he decided – life in AZ is better than in Wisconsin. Done!

      I’ll more than likely do his case-study as part of this series. Just want to let him settle first.

      If you want abundance you cannot start with a premise that you have to be in a small town because that’s where your job is. Life is bigger than that 🙂

      Thanks so much for reading!

  8. Monica Young

    Wow, this is precisely why my husband and I decided against house hacking in a multi-family home. We would have had to downgrade our current living situation and that just didn’t sit well with us. We ended up purchasing a townhouse that we love with the idea of living in it for a few years and then renting it out when we move on, but that will take forever!

    • Ben Leybovich

      What if you could purchase a property (that is not a duplex, triplex, etc.) and yet be able to generate income with it?! You could rent out your townhouse and move into the house hack without compressing your life-style. Get 2 sets of write-offs, 2 sets of cash flow. Expand your foot-print in case of organic appreciation. And potentially arbitrage VOM to get the best blended return on your time and money?!

      Stay tuned. May be my formula is appropriate for you guys 🙂

  9. Andy Krzanowsky

    A couple of nice posts to dangle the carrot and keep readers engaged. Your strategy for responses and your blogs has done well to continue to bring attention to your posts.

    Look forward to seeing what you have in store… mostly just your specific example and how it’s going for you guys. My assumption was having a separate detached structure that puts some decent distance between the primary residence and the rental. I feel the same way you do about privacy, security, and just basically quality of life. Even having that separate structure still sacrifices most of those things unless it’s a good distance from your residence.

    Noise from the house, cars in and out of the drive at hours your family doesn’t follow, sharing yard space when the weather is good (if you like to be outside in your free time), etc, etc. Small sacrifices for many but I want my space.

    Overall I’m glad finally someone is touching on the more upscale rentals and benefits of them. Our first property was just that and very few people I talk to tend to grasp the benefits of almost headache free renting. I’ll sacrifice a (minimally) smaller cash flow for the convenience factor and likely more valuable asset in 20 years considering appreciation will yield better results for the upperscale SFH.

    • Ben Leybovich

      Andy – no strategy at all. I am engaged on the subject, and that’s what you are seeing. I am excited 🙂

      Yes, most people here don’t understand the meaning of economic losses. Economic losses are silent killers of cash flow, and are a result of who you attract. And of course, as you and I know, who you attract is a function of what you’ve got!

      What we’ve got is not a separate dwelling. Why? Because those are fairly hard to come by and the search cannot be systematized. We have a single family, but with a couple of twists that are not nearly as scarce and difficult to find as an auxiliary dwelling. Plus, demographics-wise I see a trend. This is why I am excited – I think it’s a good strategy going forward for a lot for people!

      Thanks so much, Andy!

      • Brannon Pierce

        I live in Sacramento, ca and have been looking at duplexes and triplexes for me, my wife, and baby for our first property so that we can save money and upgrade in a few years. I have not yet pulled the trigger on a house but we do have the neighborhood down, however I have been doing as much research as I can before we move forward on which option works best cash flow wise.

        • Ben Leybovich

          Yes. CA is a weird market. It’s definitely a destination, on one hand. On the other hand, property taxes, values, and regulatory things make buying complicated.

  10. Kristal Pecherski

    Thank you for posting this. We used to house hack when we lived in SF, though we didn’t own our home. However, this was in our 20’s and before we “settled down.” This was also before I even knew house hacking was a term (I actually just learned this last month)! Now with a family, living in Austin TX, I desire to do the same. House Hacking is my goal in the next half year. We bought an old vintage Holiday Rambler and are turning it into a Airbnb rental at the back of our home. After that, if it goes well we might buy another (I hope so!). If we had 2, potentially our full mortgage and monthly taxes/insurance would be covered and I make a very nice salary at my 9-5 so I could save up for our next investment. Wish us luck! Looking forward to reading next weeks.

  11. Chad Carson

    “Someone accused me the other day of asking questions instead of giving answers.
    Yeah—so what?!”

    Ha! Classic line. We need more good questions. Plenty of subpar answers out there.

    I like your luxury house hack niche, Ben. Definitely fits a need for a lot of people – particularly in the family demographic where people value privacy, comfort, etc as you’ve outlined.

    Although people tend to want whiz-bang techniques, I like also providing more principle-based ideas that people can apply in multiple ways as the world/markets inevitably change. For example, the basic house hacking principle to me is this:

    1. Live in a residence that lets you produce income to offset personal housing expenses
    2. Set it up financially so that when you move out it becomes an excellent rental

    So, within house hacking there are all sort of niches. The normal 2-4 unit is well known. You’re helping to brand luxury house hacking. But there are so many niches in between, including median priced houses with accessory dwelling units, houses with big lots and space for RV or mobile home rentals (works in the South!), and even people renting parking near urban areas, stadiums, etc. The specific possibilities are endless once the principles are absorbed.

    How does luxury house hacking working with #2 – turning it into a rental later? Would the numbers work on your house, for example, if you moved out and rented both units? Would you want to?

    Cheers.

    • Ben Leybovich

      Chad – touche’

      It’s funny that you reference Luxury House Hacking as a niche. In fact, as house hacking goes, I think that my way fits a lot more people’s lives than the other way, which is only good for young kids. I think in the next few yours I’ll be proved right – the number of families with children pursuing luxury house hacking will far exceed the number of millennials doing the poor man’s hustle 🙂

      As to your question, yes – I do have several different exits, but for now (and for the enforceable future) the next step up is over a million, and I am not sure that doing so would be any more comfortable or convenient. So. for now, I’d have to answer that I am not sure how to step it up, but when ready – yes, this will make a nice upscale rental with many, many possibilities.

      Thanks, Chad!

  12. Joshua Diaz

    You have definitely got my interest. There isn’t much I can add that hasn’t been said already but I’m having fun trying to think about how you are going about this and if I end up being right or not.

    This is a great article and a great discussion that resulted from it. I’ll be staying tuned!

  13. Bill Regan

    We’ve got a studio in-law unit attached to the house, 2 miles from the vibrant downtown of Dunedin with tons of shops, restaurants and a burgeoning craft brewery scene! Also 15 minutes drive to consistently top ranked beaches in the country. 100 yards from one of the best railroads turned bike paths in the nation (bikes included with the rental of course), that takes you to aforementioned vibrant downtown on a lovely ride through charming neighborhoods.

    My wife already has a niche business managing vacation rentals in this market for another BP member too!

  14. Jennifer Molden

    Bought your book and just finished it. I am glad I found your post because this was something I was thinking about in the back of my mind and you confirmed it can be done. I am in Tucson so everything you talked about really applied. I love the fact you broke down your numbers. We definitely have our high season here and our slower summer season when all the snowbirds and students leave, so I was curious about your numbers for the summer. My husband and I are just getting into real estate investing and this seems like a good way for us to get in and upgrade to a more luxurious home. We will have to come stay at your Casita as part of our research!

    • Ben Leybovich

      Hah You guys are welcome to come stay at our Casita any time, Jennifer. And, absolutely – the strategy is killer. And totally a great way to start.

      I’ve got a great agent in Tucson. If you need a referral, reach out 🙂

      Ben

  15. Harrison Liu

    I just helped a new investor to house hack a duplex in the super hot Seattle market. For a young couple just start rei with students loan that’s the only way to get in the game starts building equity. yes they will sacrifice quality of life but it’s only temporary. they can move out in one year to meet owner occupy requirement. there are many ways to invest in real estate that can tailor to individuald’s financial needs and more importantly individuals’ financial situation. we bought our first multi-family without house hack and bought our primary residence the next year, because financially we can afford to do so. it all depends on your financial situation. it’s not one is better than the other. Btw I know how you did it i have heard your story on one of the podcast. it’s a genius strategy but finding the house to implement that strategy was truly like you said finding a needle in haystack! it’s practically impossible in today’s market. To your comments of multi-family not in the desirable location. i have multi in the Seattle core, it is in a great school and next to the hottest growth area. in rei there is no one size fit all solutions and no one is better than the other solution either. the best solution is the one that works for you well based on your situation at the moment. as you grow you can adopt new solution. so if you are a newbie with minimal capital, house hacking might work well for you. if you have more money can afford a sfh but still wanted to supplement your income finding the one that meets your needs like you did is another solution. or like many my friends who work in high tech. they can afford both, that is the best way for them have the best of both worlds.

  16. Adam Britt

    Ben!

    It is almost as if you read my mind with this post. I’m trying very hard to get into RE, and once I learned about House Hacking from BiggerPockets, I fell in love with the idea. However, my wife wasn’t quite as pleased when we started seeing the locations of these options, much less how they actually feel. Can’t wait to see more detail on bending this to your advantage! I’m at a pivotal place in life right now where we have a decent amount saved up (decent in my mind), but we are in a very, very bad housing situation. A good house hack would be the absolute ideal option.

    Speaking of, if anyone here is interested in helping a newbie out, I’m in the Birmingham Alabama area. I would absolutely love some more personal suggestions, ideas, and mentoring to make this step into the world of RE investing.

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